Stocktake: Proinsias O’Mahony

Upbeat investors shrug off weak data

Global economic weakness? Bring it on!

That’s what investors seem to be saying lately, with stocks bouncing nicely despite a raft of weak economic data.

The recent market rebound was catalysed by a weak US jobs figures a fortnight ago, while weak consumer spending data last week failed to dampen investor spirits.

This counterintuitive enthusiasm is predicated on the assumption that US rate rises are off the table for now. That assumption seems a fair one – last week, two Federal Reserve board members indicated as much, while futures data suggests no rate hikes will be forthcoming before March 2016.

The “bad news is good news” thesis can only be taken so far, of course.

Investors are pricing in a moderate economic slowdown, not a recession, and a weak earnings season might well trigger another bout of market jitters.

For now, however, calm is prevailing.

Last month, stocks were moving in lockstep, as they tend to do in times of macro uncertainty; correlations have since collapsed, with investors once again discriminating among the different stocks.

The Vix, the so-called fear index which spiked to crisis levels in late August, continues to decline, remaining below its historical average for a fortnight now. Europe's equivalent, the VStoxx, has followed the same path.

No one is saying the coast is clear, but the shift in market sentiment has been unmistakable.

Hedge fund losses continue High-profile hedge fund Fortress last week announced it was closing its $2.3 billion macro fund, barely a week after a similar announcement from private equity giant Bain Capital.

Further closures can be expected, as hedge funds haven’t handled the recent correction very well. The US hedge fund industry has suffered four consecutive monthly losses.

According to financial research firm Novus, their underperformance may be the most marked since the 2008 market collapse. The stocks most owned by hedge funds, said Novus, suffered much steeper falls than the overall market.

Aren’t hedge funds meant to hedge, one might ask, to outperform in times of trouble?

Hedge fund managers might point out that despite recent woes, they have actually outperformed global indices this year.

However, an average gain of less than 1 per cent isn’t much to boast about, and hardly makes up for the chronic underperformance that has been all too evident since the bull market began in 2009.

It’s remarkable, then, that the industry has managed to continue growing assets under management (some $3 trillion) whilst maintaining its high fees model (the average fund takes 17.7 per cent of profits, a relatively insignificant decline on the 19.3 per cent charged in 2008).

Clearly, complex-sounding hedge fund strategies appeal to many investors; it’s just a pity they tend not to work very well.

Devil's Financial Dictionary Doubtless, hedge fund managers wouldn't be too keen on The Devil's Financial Dictionary, the upcoming book from Wall Street Journal columnist Jason Zweig.

Some gems: Fees – “A tiny word with a teeny sound, which nevertheless is the single biggest determinant of success or failure for most investors.”

Forecasting – “The attempt to predict the unknowable by measuring the irrelevant.”

Tactical asset allocation – “A way of describing ‘market timing’ with nine syllables instead of four, making it sound nearly two-and-a-half times more impressive.

That does not, however, make it any more likely to be successful.”

Regulator – “A bureaucrat who attempts to stop rampaging elephants by brandishing feather-dusters at them. Also, a future employee of (or provider of services to) a bank, hedge fund, brokerage, or investment-management firm.”